Gold: Making The Winter Lows Before The Spring Stimulus Rally

Fundamentals

Gold and silver on Friday posted moderate losses on the strengthened dollar. Silver was also hurt after Germany reduced its GDP estimate for this year, which reduces expected industrial metals demand, such as silver. Germany cut its GDP forecast to 3% from 4.4%. Germany said the extended lockdown was the cause and a member of the ECB Governing Council said the "balance of risks was still on the negative side but there are signs that could turn the balance of risks to neutral." Gold did not lose much, as stocks fell, which made gold a safe haven for jittery investors. US economic data was better than expected, so silver also recovered some. Friday's US economic data was bearish for gold, but bullish for industrial metals and silver prices. The US January market to manufacturing PMI rose unexpectedly 2.02%, stronger than negative expectations and the fastest expansion since the data started being collected. Home sales also unexpectedly rose 0.7% to 6.76 million. Slacker consumer price pressures in Japan are negative for gold as a hedge against inflation. The Japan national CPI fell -4% year to year, the fastest fall in seven and a half years.

Gold is supported by the ongoing pandemic, which is dovish for central bank policies. Lockdowns, however, are negative for economic growth and industrial demand, which hurts industrial metals, such as silver. Thursday, President Biden warned that the pandemic would worsen before it got better and another 100,000 US COVID deaths are expected over the next month.

Safe-haven demand and dovish central bank policies have led to buying of precious metals in recent months. Long silver positions and ETFs rose to a record Thursday of 912,058 troy ounces. However, long gold positions are being liquidated, as long positions fell to 5¾ month low on December 22.

For gold and silver, bullish factors include highly stimulative monetary policies pursued by the world's central banks, the recent sell-off in the dollar index to a 2¾ year low, low global inflation, fund and retail buying of precious metals near or at record highs; and safe-haven demand due to the pandemic and geopolitical risks from Iran, North Korea and Venezuela. Bearish factors include bearish fears of deflation due to the long-term economic damage of the pandemic, sharply reduced industrial metal demand for silver due to the economic downturn, the recent increase in Treasury note yields to a 10-month high, which pushes investors out of non-interest bearing metals, COVID-19 vaccines may lead to a rapid economic recovery, and record high stock prices which reduces safe-haven demand for precious metals.

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Disclosure: I am/we are long GDX. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this ...

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